On January 1, a company issues bonds dated January 1 with a par value of $300,000. The bonds mature in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $312,177. The journal entry to record the first interest payment using the effective interest method of amortization is:
A) Debit Interest Expense $12,487.08; debit Premium on Bonds Payable $1,012.92; credit Cash $13,500.00.
B) Debit Interest Payable $13,500; credit Cash $13,500.00.
C) Debit Interest Expense $12,487.08; debit Discount on Bonds Payable $1,012.92; credit Cash $13,500.00.
D) Debit Interest Expense $14,717.70; credit Premium on Bonds Payable $1,217.70; credit Cash $13,500.00.
E) Debit Interest Expense $12,282.30; debit Premium on Bonds Payable $1,217.70; credit Cash $13,500.00.

Question

Quizplus · Accepted Answer

Under the effective interest method of amortization, the interest expense is calculated based on the market interest rate, which is 8%. The premium on the bonds payable is amortized over the life of the bonds as a reduction to interest expense. 
The semi-annual interest payment can be calculated as:
(Par value x contract rate x time) / 2 
= ($300,000 x 9% x 6/12) / 2 
= $13,500

The interest expense can be calculated as:
Beginning carrying value x market rate per period 
= ($312,177 - $1,012.92) x 8% x 6/12 
= $12,487.08

Therefore, the journal entry to record the first interest payment would be:
Debit Interest Expense $12,487.08
Debit Premium on Bonds Payable $1,012.92
Credit Cash $13,500.00

On January 1, a Company Issues Bonds Dated January 1